It is always important for charities (and also other types of organisations) to have the right contract in place for any type of transaction. However, no matter how stable and positive the relationship between the charity and the other party or how watertight the paperwork is, sometimes a charity simply cannot stop a breach of contract by the other party in the contractual arrangement.
Below, we have provided some advice to charities where they believe another party they have a contractual arrangement with has not fully undertaken their obligations as specified within an agreement.
What is a breach of contract?
A contract doesn’t have to be a written agreement in order for it to be breached. A breach can be of a verbal, written (express) or an implied term of a contract. A breach can occur:
- If a party refuses to perform their duties
- If the work provided to the charity by the other party is defective
- Due to the other party not paying the charity for a service or not paying within the limits specified
- Due to a failure to deliver goods or services
- As a result of a delay in providing services without a reasonable excuse
Breaches of contract typically fall into any of four categories:
- Fundamental (repudiatory); and
A minor breach of contract
A minor (or partial) breach of contract occurs where one party substantially performs or meets the essential obligations of the agreement, but doesn’t meet a minor condition.
For example, an IT company supplying a charity with a particular type of IT equipment (monitors or printers) substituting it for another similar device (a different brand or model) that may work just as well.
A material breach of contract
A material breach of contract is where the breach has serious implications often so that the charity would not have entered into the contract if the other party could not have guaranteed this obligation. It can include a failure to perform the obligations set out in the agreement or a failure to perform contracted obligations on time.
An example of this would be a builder substituting a specified part (within the agreement) for a different part that is of lesser quality and will not last as long as the part specified within the contract.
A fundamental breach of contract
A fundamental (or repudiatory) breach of contract (see repudiation below) is where the breach is severe enough that the contract can be terminated instead of the innocent party seeking compensation/damages.
For example, if a charity engaged a builder to complete some work and they abandoned the site the innocent party (the charity) may wish to terminate the contract.
An anticipatory breach of contract
As the name suggests, an anticipatory breach of contract is where a party to the contract expressly communicates that it will not be fulfilling its contractual obligations to the charitable organisation. This type of breach ends the charity’s responsibility to perform or carry out any of its contractual obligations (e.g. payment for services).
What remedies are available to a charity involved in a breach of contract?
If a condition of the contract has been breached, the charity may be able to terminate the contract by ‘repudiation’ and claim compensation for the loss it has suffered. If the breach is a breach of a warranty, compensation is by damages alone.
Damages are used to put the claimant charity back in the position it would have been if the contractual terms had been met as initially agreed between the parties.
The charity will be entitled to ‘liquidated damages’ if the agreement indicates that an amount should be paid if one party breaks the agreement.
There are two types of damages that an innocent charity can claim, which are:
- Special damages – Awarded for quantifiable losses that a claimant charity has incurred as a result of the guilty party’s actions or behaviour, such as loss of profits.
- General damages – Awarded for unquantifiable losses (e.g. where it is difficult to calculate a financial value for the losses suffered), such as physical inconvenience and loss of amenity.
There is no concept of punitive damages in the UK, so compensation will only reflect the actual loss a charity has suffered.
A less common option for breach of contract is ‘specific performance’, in which a charity obtains a Court order for the guilty party to undertake their contractual obligations.
How does a charity prove a breach of contract?
To sue for breach of contract, a charity must be able to prove that:
- There was a contract in place and that it has been breached.
- The other party has not performed their contractual duties satisfactorily. The terms and conditions of the agreement would need to be clarified and compared to what actually took place.
- The charity has suffered a loss as a result of the breach and they require compensation as a result of this loss.
It will also be expected that the claimant charity has taken reasonable steps to ‘mitigate their losses’ to reduce the impact of the breach. This is expressed as a ‘Duty to Mitigate’ and losses cannot be recovered if they could have been reasonably avoided. The party in breach may argue that the innocent party has failed to mitigate their loss in order to reduce damages received.
In terms of legal costs, the losing party within the legal proceedings would normally pay the reasonable costs of the winner, and most cases settle before they reach the Court. In some cases, it may be possible to make a claim on the basis of a conditional fee arrangement (e.g. a no win, no fee basis).
There is a six-year limitation period for bringing a breach of contract claim.
How can Nelsons help?
If you are a charity considering taking Court action due to a breach of contract the legal costs should be weighed against the amount likely to be received in damages. If you need advice about enforcing your contractual rights, please contact Sam or another member of our expert team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form to discuss how we can help you.